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In 1990, Mark Egan was four years out of business school and working as a portfolio manager at National Investment Services in Chicago when he got a call about a job at Reams Asset Management in Columbus, Ind.

Egan didn't know anything about the tiny firm, its small hometown, or its co-founder, Robert Crider. Yet, when he took a closer look, he was intrigued. "Reams was doing core-plus [bond investing] long before there was such a thing as core-plus," says Egan, 52, referring to a fixed-income strategy that buys higher risk securities in search of higher returns.

Meanwhile, Columbus belied Egan's idea of central Indiana. The city, population 45,000, is a mecca of modernist architecture, with 60 public buildings designed by such masters as I.M. Pei and Eero and Eliel Saarinen. This architectural legacy was started by J. Irwin Miller, a Columbus native who helped grow his family's engine business into what is now a $17.9 billion public company,
CumminsCMI -1.0703582132153562%Cummins Inc.U.S.: NYSEUSD138.64
-1.5-1.0703582132153562%
/Date(1427835827578-0500)/
Volume (Delayed 15m)
:
1036559AFTER HOURSUSD138.6338
-0.00619999999997844-0.00447201384881708%
Volume (Delayed 15m)
:
62825
P/E Ratio
15.336283185840708Market Cap
25497912209.2004
Dividend Yield
2.2504327755337563% Rev. per Employee
351941More quote details and news »CMIinYour ValueYour ChangeShort position
(ticker: CMI).

Cummins was also Reams' first client, says Egan, and was instrumental in nurturing the go-anywhere approach. "They had an expansive way of looking at investments," says Egan, adding that they were early adopters of high-yield, convertible, and international bonds.

FAST FORWARD TWO DECADES, and Reams, now a division of Scout Investments, manages $12 billion in fixed-income assets, which include four mutual funds. Its $505 million
Scout Core Plus Bond
fund (the retail share class, which is three years old, is SCPYX; the institutional offering is SCPZX) ranks among the top intermediate-term bond funds for virtually every time period and has averaged a 7.8% annual return over the past 15 years, better than 99% of its peers. In the past 12 months, it's up nearly 13% and outranks 93% of the more than 1,100 funds in its category.

"They're the great untold story in the fixed-income space," says Andy Iseman, CEO of Scout Investments, which acquired Reams in 2010. Other than fund names and tickers, little has changed at the boutique bond shop. Lead portfolio manager Egan and about a dozen co-managers and analysts still work out of their offices in downtown Columbus, following the script that has served them well for decades. "We've given them the latitude to continue to do what has made them so successful," says Iseman. And they do it with a net expense ratio of 0.40%, less than half the category average.

Reams Asset Management

Scout Core Plus Bond Fund

Total Returns*

1-Yr

3-Yr

5-Yr

SCPZX**

12.71%

9.41%

10.27%

Barclays Capital U.S. Aggregate Bond

5.46

6.11

6.38

Sector Breakdown***

% Of Portfolio

% of Bench-mark

Investment-grade corporate

31.1

21.1

U.S. Treasury

27.2

36.1

Mortgage-backed securities

19.4

31.9

Asset-backed securities

12.8

0.3

Cash

4.9

0

High-yield corporate

3.9

0

Government-related

0.7

10.5

*Performance data as of 10/17/12. **Refers to institutional version, which has a longer track record. *** Sector breakdown as of 9/30/12. Sources: Morningstar; company reports

In addition to scouring virtually every cranny of the fixed-income universe for bargains, Egan and his team have no qualms about making dramatic -- and typically contrarian -- changes to the portfolio. "We think the market judges risk backwards," says Egan. When investors are complacent, he's cautious. When investors are scared, he goes shopping.

At the end of 2011, for example, when European financial fears drove up yields for U.S. bank debt, the Scout Core Plus fund nearly tripled its investment-grade corporate exposure, and with a heavy emphasis on financials. "If you were ever going to be aggressive, it should have been a year ago," says Egan, who picked up 10-year
Bank of AmericaBAC -0.8376288659793815%Bank of America Corp.U.S.: NYSEUSD15.39
-0.13-0.8376288659793815%
/Date(1427835843487-0500)/
Volume (Delayed 15m)
:
59902058AFTER HOURSUSD15.38
-0.00999999999999979-0.0649772579597141%
Volume (Delayed 15m)
:
1274476
P/E Ratio
42.75Market Cap
163276618878.357
Dividend Yield
1.299545159194282% Rev. per Employee
436397More quote details and news »BACinYour ValueYour ChangeShort position
(BAC) bonds last fall, when they were yielding 8%. As other investors thought it safe to tread back in early this summer, Egan got out. "The fundamentals haven't changed, but the prices certainly have," he says. The BofA bonds now yield 3%.

Egan's focus today is "minimizing the cost of waiting." That's not to say he's hiding out in intermediate-term Treasuries. On the contrary, "we consider them an uninvestible market class," he says. While nearly a third of the fund is in Treasuries, the majority of that is Treasury bills. Mortgage- and asset-backed securities and cash make up another 37% of the fund.

Still, Egan isn't interested in venturing out on the yield curve -- it's not worth the added risk to get the extra 20 or 30 basis points, he says. He'd rather play it safe now and put the fund's assets to work when volatility returns and spreads widen.

This pattern has played out before. "We've done this several times where we are low risk, and -- lo and behold -- the market does something, and we become interested," he says. Beginning in 2005, for example, the fund dialed back its risk so that by mid-2007 only 10% of its holdings were in corporates. "That gave us the ability to go into 2008 with enormous reserves," he says. "Our models told us to buy, and buy we did." The move back into corporates and commercial mortgage-backed securities was a tad premature; the fund lost 9.2% in 2008, more than most of its peers. But it came back in 2009 with a vengeance -- gaining 35%.

Egan isn't predicting a repeat of the financial crisis. Reams does very little in the way of economic forecasting other than looking at inflation, which it expects to remain subdued in the near term before jumping within three years. Meanwhile, he says the period in 2008 and 2009, when bonds and stocks fell in tandem, has left its mark. "The market has become much more hair-trigger and responsive to things that shouldn't impact bonds," he says. "With 2008 so fresh in investors' memories, they respond irrationally."